Technico Has Determined That Its Optimal Capital Structure Is 40

question 6

Multiple Choice

Technico has determined that its optimal capital structure is 40% debt, at which point its weighted cost of capital, k_a, is 13.7%. Due to financial problems, the firm has decided to raise the proportion of debt to 50%, which will increase its weighted cost of capital to 14.4%. What is the effect on the stock price of Technico? The current dividend is $1.60 and the long-term growth rate of dividends is expected to be 8.5%.

• A) Decrease $3.65
• B) Decrease $3.96
• C) Increase $3.65
• D) Increase $3.96

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Definitions:

Workforce Participation

The total number of individuals engaged in or looking for employment within the labor market.

Student Role

The expected behaviors, responsibilities, and obligations associated with being a learner, particularly within an educational setting.

Conformity

The act of matching attitudes, beliefs, and behaviors to what is considered normal or acceptable to society or a particular group.

Obedience

Compliance with an order, request, or law or submission to another's authority.